MIKE MORRIS, Copyright 2011 Houston Chronicle |
June 15, 2011

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Harris County officials on Wednesday pledged to recoup more than $900,000 in overpayments to two brokers involved in questionable investments bought by the county's former finance chief and to tighten controls to prevent similar problems in the future.

Among the proposed changes are surprise audits of county investments and closer oversight by the county's investment committee, which has not met in more than a year.

The proposals follow revelations uncovered by a Houston Chronicle analysis of the overpayments by former Financial Services Director Edwin Harrison, who steered nearly half of the county's $7.3 billion in investment purchases since 2008 to two brokers at Morgan Stanley and UBS despite those brokers consistently charging higher prices than competitors. On some trades, the county paid the highest prices in the country.

The overpayments were confirmed by an investigation by the county attorney's office and an ongoing probe by the county auditor's office. The county attorney's investigation, which examined trades from earlier years, put the overpayments at $1.14 million.

The district attorney's office is reviewing the county attorney's findings, as well as a report by a forensic accounting firm hired by the auditor. The report, by accounting firm ParenteBeard, suggests the county strengthen its investment policy and increase the scope of its internal audits. The overpayments, the report states, "may very well be the result of weaknesses in County's investment procedures and policies."

While county officials pledged to tighten supervision and internal controls to prevent future abuses, some also questioned how the alleged abuses occurred.

"This report clearly says there needs to be more oversight, and I assure you it's going to happen," Commissioner Steve Radack said. "I think the auditor's office learned something from it. The auditor must become far more aggressive when it comes to monitoring these purchases and sales."

'Oversight is crucial'

"It's important that supervisors know their job is to supervise," Emmett said. "This is an instance where one person was not adequately supervised and he was able to do things on his own and think he was going to get away with it."

Longtime county Budget Officer Dick Raycraft said he knew some of Harrison's business activities were being investigated in early 2010 but said he did not learn the extent of the questionable investments until last summer, after the trades had been made.

"We're diligently looking at the exact reasons, and we'll be analyzing that for opportunities for improvements," Raycraft said. "Obviously, there should have been tighter controls. Oversight is crucial, and we take it very seriously.

"There's no excuse for something like this occurring," he continued. "There's enough in our policies that, if followed, would have prevented it," he said. "Anytime something like this happens you have concerns and regrets. We're trying to prevent this from occurring in the future."

Harrison, who has announced his plan to retire at the end of the month, was demoted from financial services director last September after he was indicted on theft and fraud charges unrelated to his county work.

Earlier this week, Harrison declined to comment on any of the findings by the Houston Chronicle and county attorney's office.

"Everybody is looking in the mirror and saying, 'If I was doing my job right, this wouldn't have happened,' " Assistant County Attorney Douglas Ray said. "This was very subtle, and it's very hard to understand, let alone detect. That's why it went on so long. There were weaknesses in the system, which I'm hoping are fixed now."

Chief Assistant County Auditor Steve Garner said his office ensures trades meet laws prohibiting risky investments and are accurately recorded but does not look at whether each is a good investment.

Quarterly audits of county investments could have caught the volume of business going to the two Morgan Stanley and UBS traders and the investment office's lack of competitive bidding as the problem trades ramped up in 2008, Garner said. Instead, his office learned of the problems from the county attorney in late 2009.

Review of procedures

Garner said one of the purposes of an ongoing review of Harrison's cash management and investment practices is to determine whether the auditor's office missed the problem investments in its reviews or whether the investment samples it studied were too small to show a problem.

The office increased its sample of investment trades for those audits in late 2009, Garner said.

"The controls that were in place were very good. Some of them were just circumvented," Garner said. "The audit can't be 100 percent insurance that the controls are working — that's the responsibility of management."

Emmett and Ray questioned whether the auditor's office has the staff to compare the purchase price of trades to market rates, one of the ParenteBeard report's recommendations that Garner said will be adopted.

"I don't think they have the expertise to be able to do that if they wanted to," Ray said. "You'd have to have somebody that has the kind of knowledge and experience that our investment people have."

Another fix, Ray said, may be to adopt the report's recommendation to beef up the county's five-person Investment Advisory Committee. The committee, intended to act as an additional layer of oversight, has not met in a year, he said.

"The bottom line is, whoever's got the money that ultimately belongs to the county, I'm going to be in favor of going and getting it, whether it's the firms or the individuals," Morman said.

Harrison faces his next court date in August. He and his wife were indicted Sept. 15, accused of stealing $233,000 from his sister, Cecile Harrison, 73, whom court papers describe as mentally incapacitated afer a 2007 stroke. Prosecutors allege the Harrisons filed fraudulent documents to obtain a $417,000 line of credit to build a 5,700-square-foot house near the Galleria.